Insolvent Estates and Trusts Toby Bishop and Raj Arumugam 18 - - PowerPoint PPT Presentation

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Insolvent Estates and Trusts Toby Bishop and Raj Arumugam 18 September, 2020 www.5sblaw.com 18 September, 2020 Insolvent Estates and Trusts DISCLAIMER Neither these notes nor the talk based on them nor anything said in the discussion

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Insolvent Estates and Trusts

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Toby Bishop and Raj Arumugam

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Neither these notes nor the talk based on them nor anything said in the discussion session constitute legal advice. They are simply an expression

  • f the speakers’ views, put forward for consideration and discussion.

No action should be taken or refrained from in reliance on them but independent professional advice should be taken in every case. Neither the speakers nor 5 Stone Buildings accept any legal responsibility for them.

DISCLAIMER

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“the estate of a deceased person is insolvent if, when realised, it will be insufficient to meet in full all the debts and other liabilities to which it is subject”. Section 421(4) of the Insolvency Act 1986

INSOLVENT ESTATES

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  • The Insolvency Act 1986
  • The Insolvency Rules 1986
  • The

Administration

  • f

Insolvent Estates

  • f

Deceased Persons Order 1986 (the 1986 Order)

  • Insolvency texts, for example:

– Muir Hunter on Personal Insolvency – Sealy and Milman: Annotated Guide to the Insolvency Legislation – Schaw Miller and Bailey Personal Insolvency Law and Practice

The sources

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  • The beneficiaries receive nothing.
  • The creditors receive only pennies in the pound.
  • Frequently acrimonious, sometimes litigious.

The implications of an estate being insolvent

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  • Death after petition: progress as though alive (art 5

1986 Order)

  • Death before petition: the focus of this talk.

The timing of the insolvency

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  • Creditors application for appointment of a receiver (s.37

Senior Courts Act 1981) – Made where ‘where it appears to the Court to be just to do so’ – Analysis of the purpose: Aeroflot Russian Airlines' v Berezovsky and others [2013] EWHC 1209 (Ch).

  • If administration will be by PRs out of court, grant ad

colligenda bona.

Action before a grant

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  • PRs under the direction of the Court. Rarely used.
  • Out of Court by the PRs, anecdotally most common.

Requirement for a licensed IP (s.292(2)) disapplied by art 4(3).

  • An insolvent administration order.

– PRs or creditor may apply. – Estate vests in OR then TiB when appointed (usually at creditors meeting)

The three methods of administration

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  • Find it at Schedule 6 of the 1986 Act.
  • Adjusted

by Art 4(2) reasonable funeral, testamentary and administration expenses have priority over preferential debts.

  • Secured creditors still take precedence (s.285(4))

The order of priority of creditors

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  • Any disposition after death (art. 12) is void unless

sanctioned or ratified by the Court (s.284(1)). Your fees?

– Apply for a section 284 order with or without an IAO – Personal indemnity for the PRs – Payment by the PRs personally

Practical considerations in acting for PR

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  • Re

Vos, Dick v Kendall Freeman [2006] BPIR 348, [2005] WTLR 1619

  • National Westminster Bank plc v Luke Lucas [2013]

EWHC 770 (Ch)

Ratification

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INSOLVENCY TOOL CHEST

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  • Section 421A (reversing Re Palmer [1994] Ch 316):

– Application for IAO presented within 5 years of death. – Immediately pre-death T entitled to interest as JT . – May make order requiring the survivor to pay the TiB an amount not exceeding the value lost to the estate. – Have regard to all the circumstances, but unless exceptional, the Court must assume the interests of the creditors outweigh all other considerations.

Joint tenancies

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  • T’s spouse or former spouse;
  • Any person known or believed to have the estate’s property in

their possession or be indebted to the estate;

  • Any person “appearing to the court to be able to give

information concerning the bankrupt or the bankrupt’s dealings, affairs or property.”

Summons to appear: Pt 1 (s.366(1))

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  • Compel them to submit a w/s or any document

“relating to the bankrupt or the bankrupt’s dealings, affairs or property”

  • Long v Farrer & Co [2004] EWHC 1774 (Ch)

Summons to appear: Pt 2

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  • The Court may “make such order as it thinks fit for

restoring the position to what it would have been” if the transaction at an undervalue or preference had not occurred.

Undervalue and preference

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  • Gift or a transaction which provided for T to receive

no consideration.

  • Transaction in consideration of marriage;
  • Transaction for consideration of significantly less

value than that which T provided.

Undervalue (s.399)

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  • T put a creditor, surety or guarantor in a better position in

the event of bankruptcy than he would have been in

  • therwise (s.340(3)).
  • Only applies if T was influenced by the desire to produce

that effect (s.340(4)).

  • If the preferred entity is an associate (other than

employee) the desire is presumed (s.340(5)).

Preference (s.340)

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  • A broad definition, includes:

– Present and former spouse; sibling, uncle, aunt, nephew, niece, lineal ancestor and descendant. – Includes half-blood, step children, adopted and illegitimate children. – Partners, spouses and relatives of partners. – Employees and employers. – Trustees are associated with the beneficiaries and the beneficiaries associates.

  • T is assumed to have been insolvent at the time of the transaction or

preference if it favoured an associate (s.341(2)) (important as we’ll see).

Associate (s.435)

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  • Art 23 of the 1986 Order modifies the date of

presentation of the petition to the date of death (considerably extending its reach).

The relevant time: Part 1 (s.341)

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  • Transaction at an undervalue:

– 5yrs if insolvent; – 2yrs if not.

  • Preference

(otherwise than a transaction at an undervalue): only if T was insolvent or became insolvent as a result:

– 2 yrs to an associate; – 6 months to anyone else.

The relevant time: Part 2 (s.341)

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  • These tools are available only to TiBs, not to PRs

Availability of these tools

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  • No time limit if the purpose of a transaction at an undervalue was

to put assets beyond the reach of creditors or to prejudice their interests.

  • It is not necessary to establish insolvency.
  • Re Butterworth, ex parte Russell (1882) 19 Ch D 588, 51 LJ Ch

521

  • B v IB (Order to set aside disposition under Insolvency Act) [2014] 2

FLR 273

The irrelevance of time (s.423)

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INSOLVENT TRUSTS

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  • Misnomer
  • (1) Trustees have incurred liabilities in their capacity as

trustees which exceed the value of the trust fund (balance sheet insolvency); or

  • (2) Trustees have incurred liabilities which cannot be met

as they fall due out of liquid trust assets (cash flow insolvency)

“Insolvent Trust”

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  • Personal liability of Trustees
  • “English law does not distinguish between his

personal and fiduciary capacity” (Investec Trust (Guernsey) Ltd v. Glenalla Properties Ltd [2019] 2 AC 271 at [59(iii)])

“Insolvent Trust”

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  • Contractual limit on liability
  • Statutory limit on liability
  • Trustee’s right of indemnity
  • Trustee’s right of exoneration
  • Trustee’s lien
  • Creditors subrogated to right of indemnity/lien

Mitigation of personal liability

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  • Directions from the Court - CPR Part 64
  • Parties to the application – rule 64.4
  • PD 64B
  • Compare NatWest Bank v. Lucas [2014] EWCA

Civ 1632 with Rawlinson & Hunter v ITG Ltd (Gsy Royal Court, 30 Jan 2017) What should Trustee do?

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  • Procedure for determining what third party

liabilities are to be satisfied out of the trust

  • Trustee’s administration costs
  • Trustee’s remuneration

Matters requiring directions (1)

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  • Order of priority of payment of liabilities if

limited to trust assets

  • How to realise and distribute trust assets
  • Ongoing administration of the trust pending

distribution Matters requiring directions (2)

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  • Uncertainty
  • No established procedure
  • Compare INSOL International’s Standard directions for an

insolvent trust (Oct 2017)

  • Flexibility in English courts
  • Statutory trusts (commercial context)

– MF Global UK Ltd [2013] EWHC 1655 (Ch) – Pritchard Stockbrokers Ltd [2019] EWHC 137 (Ch)

Directions – English authorities

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  • Representation of Rawlinson & Hunter re: Z

Trusts [2019] JCA 106 (Jersey CA):

– Whether trustee’s right of lien takes priority over claims of creditors to trust assets – Whether former trustee’s right of lien takes priority over that of successor trustee

Directions – offshore authorities

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  • Beneficiaries
  • Creditors

– S.172(3), Companies Act 2006

  • In the Representation of the Z Trust [2015] JRC

196C (Royal Court, Jersey)

  • In Re: F (32/2013) (Guernsey Court of Appeal)

Duties of Trustee upon onset of insolvency

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  • Beneficiaries
  • Creditors

– S.172(3), Companies Act 2006

Duties of Trustee upon onset of insolvency

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  • In the Representation of the Z Trust [2015] JRC

196C (Royal Court, Jersey)

  • In Re: F (32/2013) (Guernsey Court of Appeal)

Duties of Trustee upon onset of insolvency

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  • Office
  • Exercise of powers:

– Individual trustee (bankrupt) – Corporate trustee (liquidation) – Corporate trustee (administration)

  • Trust property
  • Trustee’s right of indemnity

Insolvency of the Trustee

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Thank you

18 September, 2020

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Toby Bishop tbishop@5sblaw.com Raj Arumugam rarumugam@5sblaw.com 020 7242 6201